Zedge, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended July 31, 2019. This is an annual filing, not a standalone fiscal fourth-quarter report; Q4 comparisons are noted where disclosed. Financial amounts are in U.S. dollars.
Business context
Zedge operates a mobile personalization app and digital publishing platform, with more than 33 million monthly active users (MAU) and about 396 million cumulative installs at fiscal year-end. Advertising remained the primary business: approximately 90% of annual revenue came from advertising. Zedge Premium, a creator-content marketplace, and paid ad-free subscriptions were early-stage efforts to diversify revenue.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $8.816 million | $10.833 million |
| Direct costs of revenue | $1.379 million | $1.518 million |
| Operating loss | $2.887 million | $1.299 million |
| Net loss | $3.344 million | $1.563 million |
| Operating cash flow | $76,000 | $332,000 |
| Investing cash flow | $(1.740) million | $(1.702) million |
| Cash at year-end | $1.609 million | $3.408 million |
- Revenue fell 18.6%; net loss more than doubled. Approximate operating margin was negative 32.7% (FY2018: negative 12.0%); net margin was negative 37.9% (FY2018: negative 14.4%). Direct costs were 15.6% of revenue, versus 14.0%.
- MAU declined 2.8% to 33.8 million from 34.8 million. In Q4 FY2019, users in emerging markets grew 8.2% year over year, while users in developed markets fell 18.3%. Average revenue per MAU declined 20.3% to $0.0196.
- Advertising revenue was $7.940 million, service revenue $592,000, and other revenue $284,000. The third-party publisher services agreement ended May 31, 2019.
- Zedge Premium generated $485,000 gross transaction value and $130,000 net revenue, compared with $42,000 and $16,000, respectively, in FY2018. Ad-free subscriptions generated $516,000 in prepaid sales and $155,000 in recognized revenue during the six months ended July 31, 2019; approximately 129,000 subscriptions were active at year-end.
- Cash and working capital were $1.609 million and $1.2 million, respectively. The $2.5 million revolving credit facility had no borrowings outstanding; it is secured by substantially all assets and matures September 26, 2020. A $141,000 insurance-premium loan was a current liability. Management expected cash on hand and operating cash flow to cover anticipated needs through July 31, 2020.
Material changes, outlook and risks
- Management attributed weaker revenue mainly to the shift toward lower-ad-rate emerging markets, termination of publisher services, and discontinuation of certain monetization methods. New subscription and Premium revenue only partly offset the decline.
- SG&A decreased 7.1% to $8.897 million, while depreciation and amortization rose 38.1% to $1.427 million as completed software projects entered amortization. A $250,000 investment in TreSensa was fully impaired; the associated distribution agreement had ended in April 2019.
- The company continued to invest in Premium, subscriptions, user growth and new entertainment apps, including planned Chat Stories. Management said Premium was scaling more slowly than expected and print-on-demand sales had not met expectations. No quantified revenue or earnings guidance was provided; management planned to optimize subscription pricing and features in FY2020.
- In September 2019, after year-end, Google Play temporarily removed the app over buggy code from a third-party advertising integration. The app was reinstated after about 72 hours; management estimated roughly $100,000 in lost revenue and a preliminary 15%–18% MAU decline, primarily in emerging markets.
- CEO Tom Arnoy resigned in August 2019; Executive Chairman Michael Jonas became interim CEO. A restructuring was expected to reduce headcount from 53 at year-end to 45 by September 1, 2019.
- Major risks include heavy reliance on advertising and third-party ad platforms, user declines in higher-monetizing markets, dependence on Google Play and Android, early-stage diversification initiatives, limited cash and continued losses, customer concentration, foreign-exchange exposure, privacy and content regulation, and control by a majority-voting stockholder. The company reported no material litigation accruals; a long-running Saregama India case was dismissed after the injunction was lifted in August 2019.
Key facts for investors to verify
- Whether MAU and revenue per MAU stabilize, particularly in North America and Europe, and whether the post-suspension user decline persists.
- Whether subscriptions and Zedge Premium grow into material, recurring revenue sources; compare prepaid sales with revenue recognized and deferred revenue.
- Whether management’s liquidity expectation holds given low operating cash flow, cash depletion, ongoing investment needs and the September 2020 revolver maturity.
- How the CEO transition and planned workforce reduction affect product development, user growth and expense levels.
- Potential effects of advertising-platform concentration, the Norwegian transfer-pricing recommendation, and the full valuation allowance on deferred tax assets.